04 A NNUAL REPORT GTS CZECH

2004

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

01 TABLE OF CONTENT S Presentation Part Board of Directors‘ Report of the GTS CZECH, a.s., Company‘s Business Activities and Assets in 2004

02

Auditor’s Report to the Shareholder of GTS CZECH, a.s.

08

Financial Part Financial Statements

10

Notes to the Czech Statutory Financial Statements

18

Report of Control Relationships

32

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

02 B O ARD O F DIRECTORS ’ R E P O R T O F T H E GT S CZECH, A .S., COM PA N Y ‘ S B U S I N E S S A C TIVITIES AND AS SE T S I N 2 0 0 4 Introduction by the Chairman of the Board of Directors Dear Colleagues, Shareholders, and Business Partners, Dear Friends, The year 2004 was, in many respects, a continuation of the trends of previous years in telecommunications. On the other hand, it was also a breakthrough year, in which many changes took place that had been anticipated for number of years. Regarding regulation, there was progress in the new Telecommunications Act in 2004. Companies active on the telecommunication market did participate in the Act‘s preparation; but we have to state that the results do not meet our expectations. At the same time, we have to say that the amendment to the Act was necessary and it is a positive development that the new Act was passed. The consolidation of the telecommunication market also began in 2004. I can proudly declare that GTS CZECH, a.s. played the main role in this process. At the end of the year, we signed a contract for the acquisition of a 100% of the shares of our competitor Aliatel. The acquisition process was successfully completed at the beginning of 2005. Our success was not restricted to this acquisition. In 2004, we were also able to maintain our position as a major telecommunication provider. Both EBITDA (earnings before interest, tax, depreciation and amortisation) and net profit rank us among the most successful alternative telecommunication providers on the Czech telecommunication market. Our ability to generate sustained profits is the key factor of our financial stability.

Customers who use our services also appreciate our strength. In 2004, the Company successfully confirmed and enhanced its position in all key segments of the market. In addition to services for large companies and individual corporate solutions, we also provided services to an increasing number of medium- and smallsize enterprises, independent sole proprietors, and also households. Despite continuing restrictions from the state and the dominant operator, we have also been successful in the area of state and municipal authorities. Thanks to all these facts, our revenues increased by 10% in a highly-competitive environment of everdeclining prices. We continued investment into the telecommunication network with about a quarter of a billion crowns invested into extension of enduser access lines. Efficient investment policy remains one of the main pillars of our strategy. 2004 was a successful year for our company. It confirmed that the direction we follow and the priorities we hold are correct. In the future, we want to continue to provide our customers with reliable high-quality services and to introduce new products and solutions to the market. Our key target segments remain companies (from large corporations to medium- and small-size companies), as well as the state-authorities. Self-employed sole proprietors and households are of growing interest as well. However, our activities in these segments are restricted by the situation prevailing on the telecommunication market. We therefore want to play an even greater role in developing this market, so that not only our customers benefit, but the general public as well. In conclusion, I would like to thank all customers who use our services. I also thank our employees and colleagues, without whom the company‘s success would be impossible. I thank our shareholders for their support and trust. GTS CZECH, a.s., is a company which is successful on a long-term basis. I am sure that it will remain so in the years to come.

Milan Rusnák Chairman of the Board of Directors, GTS CZECH, a.s.

03 B OARD OF DIRECTO R S ’ R E P O R T O F T H E GTS CZECH, A .S., C O M PA N Y ‘ S B U S I N E S S ACTIVITIES AND AS S E T S I N 2 0 0 4 Company Profile

Key Activities

HISTORY 22 February 2000 – GTS CZECH is created by a merger of the companies Dattel, GTS Czech Net and INEC. At the same time, it becomes part of the GTS Central European Division. 19 October 2001 – The Dutch company KPNQwest N.V. signs an agreement for the takeover of GTS Inc. assets. 2 May 2002 – The operations of the companies KPNQwest Czechia and GTS CZECH are merged. 30 May 2002 –The Dutch company KPNQwest N.V. applies for protection from creditors; about 40 subjects are interested in the KPNQwest telecommunication network. 8 August 2002 – AnTel Holding Ltd. signs a contract for future contract with KPNQwest/GTS. 1 October 2002 – The company AnTel Holdings Ltd. acquires 100% of the company KPNQwest/GTS, which reassumes the name GTS CZECH. 6 October 2003 – GTS CZECH offers its own high-speed Internet access ADSL solution in the pilot areas of Prague 1 and 2 City Districts. 18 December 2004 – GTS CZECH signs a contract for purchase of a 100% share in Aliatel.

In 2004, GTS CZECH, a.s., focused both on improvement of the quality of existing services and on extension of it’s portfolio. The greatest emphasis was put on products and services for businesses.

PROFILE The company GTS CZECH, a.s., has been offering its services on the Czech market since 1991. It provides companies and households with a complete portfolio of telecommunication services. The company’s network covers most towns in the Czech Republic. Interconnection between the national fully-digitised network and the GTS international network ensures the best and most stable connection to global Internet on the Central European market.

In the area of voice services, Telemeeting Plus was introduced, which enables conference calls with large numbers of parties. In the area of voice services, we also put great emphasis on the development of added-value services provided to our clients. The total quantity of call-minutes using the Green and Blue Phone services increased by more than 100%. We offered an option of conditional forwarding for these services. Customers can forward calls according to the day of the week and the time of day. In the second half of 2004, we extended our voice services by adding a completely new Green Phone from Abroad service, which enables toll-free calls to the Czech Republic from foreign countries. In data and Internet services, GTS Profiband Access was introduced, a combination of leased-line Internet access and direct-connection voice services. The service is suitable for medium- to large companies. Monitoring of private data networks is another newly introduced range of services – a website interface, showing the status of individual subscriber lines, and a customer communication platform are offered. An important step was the extension of the IP VPN service portfolio to include services based on MPLS technology. ADSL access to VPN was also extended. Thanks to changes in ADSL services, the number of lines we installed in 2004 was substantially increased.

The company‘s regional offices are located in Liberec, Ústí nad Labem, Pilsen, České Budějovice, Hradec Králové, Brno, Olomouc and Ostrava. GTS operates top-level data centres in Prague, Brno and Ostrava, where its customers can install their servers in secure, air-conditioned premises with direct connection to the GTS backbone network. GTS has been granted a ČSN EN ISO 9001:2001 certificate; the company passed a security audit by the National Security Authority.

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

04 B O ARD O F DIRECTORS ’ R E P O R T O F T H E GT S CZECH, A .S., COM PA N Y ‘ S B U S I N E S S A C TIVITIES AND AS SE T S I N 2 0 0 4 Company Evolution, and Regulatory and Legal Environment in 2004

Business Policy and Marketing

From the regulatory and legal environment viewpoint, the new law on electronic communication was the most important feature in 2004. GTS representatives actively participated in the work of individual committees within the framework of APVTS, cooperating with the Ministry of Informatics in preparing the text of the Act. In the second half of the year, work on implementation decrees and regulations connected with the Act was carried out.

GTS improved service to corporate clients in 2004, for example by segmentation of products, orientation of the business approach to the requirements and needs of specific target groups, and differentiation of communication and marketing activities for these groups. We also started, to a greater extent, to utilise modern outlet channels, such as Internet portals and call centres, and we entered the household segment of the market for the first time.

Regarding the legal environment, amendments to networkinterconnection agreements with cellular network operators and Český Telecom were put forward, and a new network-interconnection agreement with Czech On Line was signed. The networkinterconnection agreement between GTS CZECH and Aliatel was not signed due to the pending acquisition. The newly-signed agreement and amendments to existing agreements implemented pricing decisions made by the Czech Telecommunication Office, and also extended the range of the mutually-provided services.

During the year, emphasis was put on increasing productivity in all business activities, whether by the improvement of quality and the qualifications of our business representatives and authorised business partners, or by consistently working with each client for the entire term of the relationship, from the request for implementation, to error-free operation and high-quality support.

However, in the second half of the year, Český Telecom blocked preparations for signing the amendments to the interconnection agreement due to lawsuit concerning about the payment for interconnection trunks. During this period, GTS CZECH, a.s. representatives actively participated in the activities of the APVTS working committee, which was aimed at agreement between the alternative operators and Český Telecom on terms and conditions for the provision of special-tariff Internet access services and the protection of users from illegal dialler software. The working committee‘s work was completed with an agreement which is currently being implemented.

A marketing campaign took place in the media in February and March 2004, to facilitate the launch of our offer for the household segment of the market. The campaign was focused on households, and the product offered was flat-rate Internet access. GTS was the first telecommunication provider which offered Internet for flat rate. The campaign in the press and on the radio had a high level of response. However, the service had to be stopped due to a failure to agree suitable wholesale rates for traffic.

05 B OARD OF DIRECTO R S ’ R E P O R T O F T H E GTS CZECH, A .S., C O M PA N Y ‘ S B U S I N E S S ACTIVITIES AND AS S E T S I N 2 0 0 4 Customer Support, Monitoring and Contact Centres

Investment

GTS CZECH, a.s., provides its customers with non-stop support 24 hours a day, seven days a week. The services are monitored non-stop in order to ensure a high level of availability and quality. Our goal is to provide error-free services and the complete satisfaction of our customers. We are ready to provide our customers with professional assistance as needed, giving advice about the service parameter settings, or explaining our billing system. A team of professionally qualified operators and technicians looks after our customers. We give a great deal of attention to the quality of our processes and procedures. As a result, we have substantially increased the availability of our toll-free information lines and the speed of processing of telephone or written requests for our services. The following figure, which shows the evolution of the number of services provided and the number of complaints, demonstrates the success of our strategy.

EVOLUTION OF COMPLAINTS 0.7%

20000

MAIN INVESTMENTS AND FINANCING The amount of investment in 2004 was of the same level as 2003, should be a moderate 2% decrease. Investment into the IP network increased international connectivity and enhanced the national backbone network in the Czech Republic. All telephone exchanges in the Czech Republic were upgraded. All investments are financed by a combination of the Company‘s own resources with supplier financing.

FINANCIAL INVESTMENTS The Company owned the following ownership interests in 2004: - AGIS Telekomunikace s.r.o. with its registered office at Pod hřištěm 6, 101 00 Praha 10 (ownership interest 49%); - E-komunikace, s. r. o. (formerly eldentity, s. r. o.), with its registered office at Hvězdova 1073/33, 140 21 Praha 4 (ownership interest 10%).

0.6% 15000

0.5% 0.4%

10000 0.3% 0.2%

5000 number of services

0.1%

number of complaints 0

01

02

03

04

05

06

07

08

09

10

11

12

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

06 B O ARD O F DIRECTORS ’ R E P O R T O F T H E GT S CZECH, A .S., COM PA N Y ‘ S B U S I N E S S A C TIVITIES AND AS SE T S I N 2 0 0 4 T H E M A I N I N V E S T M E N T S I N T H E L A S T T H R E E Y E A R S A N D M E T H O D S O F F I N A N C I N G T H E R E O F (ths. CZK) 2004

Actual 2003

2002

107,513

110,267

164,535

- voice

33,849

41,867

79,631

- data

27,536

31,798

37,475

- Internet access lines

46,127

36,603

46,925

0

0

504

Project Customer connection lines

- others Investment into backbone network

103,735

100,682

162,343

- upgrade of national backbone network

8,401

32,961

57,679

- upgrade of Prague backbone network

10,106

- extension of IP backbone network

26,154

53,206 10,889

- extension of backbone network in South Moravia

7,400

31,580

- extension of backbone network in North Moravia

2,890

12,561

- network management

7,781

4,533

- upgrade of exchanges

34,873

31,522

6,131

25,310

2,785

24,268

31,308

22,159

235,516

242,257

349,037

- Telehouse Praha - others Investment into information systems Investment – total S E L E C T E D F I N A N C I A L A N D O P E R A T I O N A L I N D I C E S (ths. CZK) 2004

2003

2002

TOTAL ASSETS

4,071,038

2,228,677

2,514,381

Intangible assets

1,500,692

1,683,545

1,878,378

Current assets

2,554,336

526,272

585,818

Other assets Capital Liabilities – Outside Resources Other liabilities Revenues from goods sold

16,010

18,860

50,185

–181,838

–128,930

–189,165

4,242,414

2,346,403

2,540,811

10,462

11,204

162,735

4,037

2,476

3,154

2,216,437

2,042,194

1,971,724

Added Value

636,578

570,077

597,858

Operating profit (loss)

–95,593

–110,691

–229,913

Profit (loss) for the period

–52,908

60,235

–283,817

364

369

331

6,100

5,541

5,966

Revenues from own products and services

Number of employees Productivity of work

07 B OARD OF DIRECTO R S ’ R E P O R T O F T H E GTS CZECH, A .S., C O M PA N Y ‘ S B U S I N E S S ACTIVITIES AND AS S E T S I N 2 0 0 4 Employment Policy and Social Programme E M P LOY M E N T P O L I C Y A N D S O C I A L P R O G R A M M E

C U LT U R E

The numbers and structure of the personnel correspond to the Company‘s needs. The highest emphasis is put on the selection of highly-qualified employees who are able to fulfil the Company‘s goals. An integral part of each employee‘s career plan is continuing education and personal development, so that the expected professional and personality traits are achieved and necessary professional development is provided to everyone. The average age of a Company employee was 31.75, as of 31 December 2004. Regarding their educational levels, the majority of employees were secondary-school (55%) and university (39%) graduates.

The company supports the cultural interests of its employees. Within the benefit programme, each employee is entitled to a 20% discount on any performance at the National Theatre, Divadlo Kolowrat and Stavovské Divadlo theatres. SPORTING ACTIVITIES Each employee can utilise the sporting activities available within the benefit programme. SPONSORSHIP

Health care for the personnel complies with the applicable laws and regulations. A large proportion of the benefit programme is devoted to cultural and sporting activities, helping with relaxation away form work.

The company sponsors cultural and humanitarian activities. In the area of sports, sponsorship is traditionally focused on golf.

Salary evolution reflects the company and employee requirements; it responds to the development in the telecommunication market. In addition to the fixed part of the salary, a bonus part reflects each employee‘s performance. Salaries and other benefits are determined according to benchmarking surveys in the Hi-Tech area. H E A LT H C A R E All employees are entitled to an above-standard initial medical examination, carried out by the company COMFORT CARE, a. s.

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

08 AU DITOR’S REPORT TO T H E S H A R E H O L D E R O F GTS C ZECH, A .S. On the basis of our audit, on 31 March 2005 we issued an auditor’s report on the Company’s statutory financial statements, which are included in this annual report and our report was as follows:

4

“We have audited the accompanying financial statements of GTS CZECH, a.s. for the year ended 31 December 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the Act on Auditors and the auditing standards of the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present, in all material respects, a true and fair view of the assets, liabilities, equity and financial position of GTS CZECH, a.s. as of 31 December 2004 and the results of its operations for the year 2004 then ended in accordance with the Act on Accounting and relevant legislation of the Czech Republic.” We have reviewed other financial information in the annual report for consistency with the audited financial statements. In our opinion, the information is consistent in all material respects with the audited financial statements.

The management of the Company is responsible for the completeness and accuracy of the report on relations between related parties. Our responsibility is to review the accuracy of the information included in the report. During our review nothing came to our attention that would cause us to believe that the information contained in the report is materially inaccurate. Prague 16 June 2005

KPMG Česká republika Audit, s.r.o. Licence number 71

Jan Martínek Licence number 1598

4 FINANCIAL PART

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

10 F I N ANCIAL STATEMEN T S Balance sheet in full format (non-consolidated) as at 31 December 2004 (in thousands of Czech crowns TCZK) Ident. a

ASSETS

line

b

c

Gross 1

TOTAL ASSETS (L.2+3+31+63)

1

5,900,544

2004 Adjust. 2

Net 3

2003 Net 4

-1,829,506

4,071,038

2,228,677

A.

Receivables for subscribed registered capital

2

0

0

0

B.

Fixed assets (L.4+13+23)

3

3,094,964

-1,594,272

1,500,692

1,683,545

B. I.

Intangible fixed assets (L.5 to 12)

4

93,896

-60,246

33,650

33,707

5

103

-89

14

35

2. Research and development

6

0

0

0

0

3. Software

7

89,245

-60,157

29,088

33,344

4. Royalties

8

0

0

0

0

B. I. 1. Incorporation expenses

5. Goodwill

9

0

0

0

0

10

0

0

0

0

7. Intangible fixed assets under construction

11

4,548

0

4,548

328

8. Advance payments for intangible fixed assets

12

0

0

0

0

13

2,991,946

-1,533,516

1,458,430

1,649,838

14

0

0

0

0

6. Other intangible fixed assets

B. II.

Tangible fixed assets (L.14 to 22)

B. II. 1. Land 2. Buildings, halls and structures

15

705,040

-335,782

369,258

418,477

3. Property, plant and equipment

16

1,960,917

-1,113,049

847,868

965,340

4. Cultivated areas

17

0

0

0

0

5. Livestock

18

0

0

0

0

6. Other tangible fixed assets

19

33

0

33

33

7. Tangible fixed assets under construction

20

1,531

0

1,531

4,579

8. Advance payments for tangible fixed assets

21

100

0

100

147

9. Adjustments to acquired fixed assets

22

324,325

-84,685

239,640

261,262

Long-term investments (L.24 to 30)

23

9,122

-510

8,612

0

B. III. 1. Investments in group undertakings

B. III.

24

0

0

0

0

2. Investments in associated companies

25

490

-490

0

0

3. Other long-term securities and ownership interests

26

20

-20

0

0

4. Loans - group undertakings, associated companies

27

8,612

0

8,612

0

5. Other long-term investments

28

0

0

0

0

6. Long-term investments (provisional value)

29

0

0

0

0

7. Advance payments for long-term investments

30

0

0

0

0

11 FINANCIAL STATEM E N T S Balance sheet in full format (non-consolidated) as at 31 December 2004 (in thousands of Czech crowns TCZK) Ident.

ASSETS

line

2004 Adjust. 2

Net 3

2003 Net 4

a

b

c

Gross 1

C.

Current assets (L.32+39+48+58)

31

2,789,570

-235,234

2,554,336

526,272

C. I.

Inventories (L.33 to 38)

32

15,655

-2,266

13,389

12,354

33

15,655

-2,266

13,389

12,354

2. Work-in-progress and semi-finished products

34

0

0

0

0

3. Finished goods

35

0

0

0

0

4. Livestock

36

0

0

0

0

5. Goods for resale

37

0

0

0

0

6. Advance payments for inventory

38

0

0

0

0

39

18,832

0

18,832

19,804

40

18,832

0

18,832

19,804

2. Receivables - group undertakings

41

0

0

0

0

3. Receivables - associated companies

42

0

0

0

0

4. Receivables from shareholders/owners and alliance partners

43

0

0

0

0

5. Long-term advances paid

44

0

0

0

0

6. Estimated receivables

45

0

0

0

0

7. Other receivables

46

0

0

0

0

8. Deferred tax asset

47

0

0

0

0

48

681,556

-232,968

448,588

441,310

C. I. 1. Raw materials

C. II.

Long-term receivables (L.40 to 47)

C. II. 1. Trade receivables

C. III.

Short-term receivables (L.49 to 57)

C. III. 1. Trade receivables

C. IV.

49

665,152

-232,968

432,184

417,879

2. Receivables - group undertakings

50

0

0

0

0

3. Receivables - associated companies

51

0

0

0

0

4. Receivables from shareholders/owners and alliance partners

52

0

0

0

0

5. Social security and health insurance

53

0

0

0

0

6. Tax receivables and state subsidies receivable

54

14

0

14

8,669

7. Short-term advances paid

55

7,802

0

7,802

6,597

8. Estimated receivables

56

0

0

0

0

9. Other receivables

57

8,588

0

8,588

8,165 52,804

Short-term financial assets (L.59 to 62)

58

2,073,527

0

2,073,527

59

237

0

237

224

2. Bank accounts

60

2,073,290

0

2,073,290

52,580

3. Short-term securities and ownership interests

61

0

0

0

0

4. Short-term investments (provisional value)

62

0

0

0

0

C. IV. 1. Cash

D. I.

Accruals and deferrals (L.64+65+66)

63

16,010

0

16,010

18,860

64

16,010

0

16,010

18,860

2. Complex prepaid expenses

65

0

0

0

0

3. Accrued revenue

66

0

0

0

0

D. I. 1. Prepaid expenses

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

12 F I N ANCIAL STATEMEN T S Balance sheet in full format (non-consolidated) as at 31 December 2004 (in thousands of Czech crowns TCZK) Ident. a

LIABILITIES b

line c

2004 5

2003 6

TOTAL LIABILITIES AND EQUITY (L.68+85+118)

67

4,071,038

2,228,677

A.

Equity (L.69+73+78+81+84)

68

-181,838

-128,930

A. I.

Registered capital (L.70+71+72)

69

100,000

100,000

70

100,000

100,000

71

0

0

A. I. 1. Registered capital 2. Own shares held (-) 3. Changes in registered capital A. II.

Capital contributions (L.74 to 77)

A. II. 1. Share premium 2. Other capital contributions

A. III.

0

0

610,526

610,526

74

80,974

80,974

75

529,552

529,552

3. Revaluation of assets and liabilities

76

0

0

4. Revaluation reserve on transformations

77

0

0

78

3,468

457

79

3,468

457

Reserve funds (L.79+80)

A. III. 1. Statutory reserve fund / Undistributable reserves A. IV.

72 73

2. Statutory and other reserves

80

0

0

Retained earnings (L.82+83)

81

-842,924

-900,148

A. IV. 1. Retained profits 2. Accumulated losses

82

0

0

83

-842,924

-900,148

A. V.

Profit (loss) for the current period (+/-)

84

-52,908

60,235

B.

Liabilities (L.86+91+102+114)

85

4,242,414

2,346,403

B. I.

Provisions (L.87 to 90)

86

3,484

7,218

87

0

0

B. I. 1. Tax-deductible provisions

B. II.

2. Provision for pensions and other similar payables

88

0

0

3. Income tax provision

89

0

0

4. Non-deductible provisions

90

3,484

7,218

91

3,158,135

1,011,179

Long-term liabilities (L.92 to 101)

B. II. 1. Trade payables 2. Liabilities - group undertakings

92

0

0

93

0

0

3. Liabilities - associated companies

94

0

0

4. Liabilities to shareholders/owners and alliance partners

95

0

0

5. Long-term advances received

96

0

0

6. Debentures and bonds issued

97

0

0

7. Long-term bills of exchange payable

98

0

0

8. Estimated payables

99

0

0

100

3,158,135

1,011,179

101

0

0

9. Other long-term payables 10. Deferred tax liability

13 FINANCIAL STATEM E N T S Balance sheet in full format (non-consolidated) as at 31 December 2004 (in thousands of Czech crowns TCZK) Ident. a

LIABILITIES b

line c

2004 5

2003 6

B.III.

Short-term liabilities (L.103 to 113)

102

990,445

1,174,506

103

834,533

925,534

2. Liabilities - group undertakings

104

0

0

3. Liabilities - associated companies

105

0

0

4. Liabilities to shareholders/owners and alliance partners

106

0

0

5. Payables to employees

107

9,338

11,460

6. Payables to social security and health insurance

108

6,449

6,967

7. Tax liabilities

109

8,487

10,455

8. Short-term advances received

110

40,948

25,864

9. Debentures and bonds issued

111

0

0

10. Estimated payables

112

90,612

190,845

11. Other payables

113

78

3,381

B. III. 1. Trade payables

B. IV.

114

90,350

153,500

B. IV. 1. Long-term bank loans

115

30,000

90,000

2. Short-term bank loans

116

60,000

60,000

3. Short-term financial liability

117

350

3,500

C. I.

Bank loans and overdrafts (L.115+116+117)

118

10,462

11,204

C. I. 1. Accrued expenses

Accruals and deferrals (L.119+120)

119

0

0

2. Deferred revenues

120

10,462

11,204

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

14 F I N ANCIAL STATEMEN T S Profit and loss account - classification by nature (non-consolidated) for the year ended 31 December 2004 (in thousands of Czech crowns TCZK) Ident. a

Line c

2004 1

2003 2

Revenue from goods

1

4,037

2,476

Cost of goods sold

2

4,007

2,359

+

Gross profit (L.1-2)

3

30

117

II.

Revenue from production (L.5+6+7)

4

2,216,437

2,042,194

II. 1. Revenue from own products and services

5

2,216,437

2,042,194

II. 2. Change in inventory of own production

6

0

0

II. 3. Own work capitalized

7

0

0

Cost of sales (L.9+10)

8

1,579,889

1,472,234

9

26,595

30,496

10

1,553,294

1,441,738

Added value (L.3+4-8)

11

636,578

570,077

Personnel expenses (L.13 to 16)

12

283,266

262,611

I. A.

B.

TEXT b

B.

1. Materials and consumables

B.

2. Services +

C. C.

1. Wages and salaries

13

204,333

192,403

C.

2. Remuneration of board members

14

0

0

C.

3. Social security and health insurance expenses

15

75,045

65,872

C.

4. Social expenses

16

3,888

4,336

D.

Taxes and charges

17

23,138

16,155

E.

Depreciation of intangible and tangible fixed assets

18

417,250

401,999

Proceeds from disposals of fixed assets and raw material (L.20+21)

III.

19

4,763

19,802

III. 1 Proceeds from disposals of fixed assets

20

4,763

19,783

III. 2 Proceeds from disposals of raw material

21

0

19

22

2,560

17,635

F.

Net book value of fixed assets and raw material sold (L.23+24)

F.

1. Net book value of fixed assets sold

23

2,560

17,635

F.

2. Raw material sold

24

0

0

in complex prepaid expenses

25

-18,884

-19,353

G.

Change in provisions and adjustments relating to operating activity and change

IV. H. V. I. *

Other operating revenues

26

2,999

31,098

Other operating expenses

27

32,603

52,621

Adjustments to operating revenues

28

0

0

Adjustments to operating expenses

29

0

0

Operating profit (loss) (L.11-12-17-18+19-22-25+26-27+28-29)

30

-95,593

-110,691

15 FINANCIAL STATEM E N T S Profit and loss account - classification by nature (non-consolidated) for the year ended 31 December 2004 (in thousands of Czech crowns TCZK) Ident. a VI. J. VII.

TEXT b

Line c

2004 1

2003 2

Proceeds from sale of securities and ownership interests

31

0

0

Securities and ownership interests sold

32

0

0

33

0

0

VII. 1. Revenue from intercompany securities and ownership interests

34

0

0

VII. 2. Revenue from other long-term securities and ownership interests

35

0

0

VII. 3. Revenue from other long-term investments

36

0

0

VIII. K. IX. L. M. X. N. XI. O. XII. P. * Q.

Revenue from long-term investments (L.34+35+36)

Revenue from short-term financial investments

37

0

0

Financial assets expenses

38

0

0

Revenue from revaluation of securities and derivatives

39

0

0

Expenses for revaluation of securities and derivatives

40

0

0

Change in provisions and adjustments relating to financial activity

41

-20

-18,741

Interest revenue

42

1,373

556

Interest expense

43

64,390

65,430

Other financial revenue

44

150,850

274,283

Other financial expenses

45

47,287

58,831

Adjustments to financial revenues

46

0

0

Adjustments to financial expenses

47

0

0

(L.31-32+33+37-38+39-40+41+42-43+44-45+46-47)

48

40,566

169,319

Income tax on ordinary profit (loss) (L.50+51)

49

0

278

Profit (loss) from financial operations

Q.

1. - current

50

0

278

Q.

2. - deferred

51

0

0

**

Profit (loss) on ordinary activities after taxation (L.30+48-49)

52

-55,027

58,350

XIII.

Extraordinary revenue

53

1,929

6,784

R.

Extraordinary expenses

54

-190

4,899

S.

Income tax on extraordinary profit (loss) (L.56+57)

55

0

0

S.

1. - current

56

0

0

S.

2. - deferred

57

0

0

Extraordinary profit (loss) (L.53-54-55)

58

2,119

1,885

T.

Transfer of profit or loss to partners

59

0

0

***

Profit (loss) for the accounting period (L.52+58-59)

60

-52,908

60,235

****

Profit (loss) before taxation (L.30+48+53-54)

61

-52,908

60,513

*

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

16 F I N ANCIAL STATEMEN T S Cash flow statement (non-consolidated) for the year ended 31 December 2004 (in thousands of Czech crowns TCZK)

P.

Cash and cash equivalents, beginning of year

2004

2003

52,804

41,298

Net operating cash flow Z.

Accounting profit (loss) from ordinary activities

-55,027

58,628

A.1.

Non-cash transactions

459,243

391,781

A.1.1.

Depreciation of fixed assets

395,628

383,741

A.1.2.

Change in:

2,718

-54,704

21,622

21,621

-18,904

-76,325

A.1.2.1. adjustments to acquired assets A.1.2.2. provisions and other adjustments A.1.3.

Profit(-) Loss(+) on sale of fixed assets

-2,203

-2,148

A.1.4.

Profit(-) Loss(+) on sale of securities

0

0

A.1.5.

Revenue from dividends and profit distribution

0

0

A.1.6.

Expense and revenue interests accounted for

63,017

64,874

83

18

changes in working capital and extraordinary items

404,216

450,409

A.2.

Current assets

-224,003

-150,993

A.2.1.

Change in receivables and other temporary assets

A.2.2.

Change in short-term liabilities and other temporary liabilities

A.2.3.

Change in inventory

A.2.4.

Change in short term financial assets

A.1.7.

Other non-cash transactions

A.*

Net operating cash flow before financial items,

A.**

Net operating cash flow before financial balances, taxation and extraordinary items

A.3.

Interest paid excluding amounts capitalised

A.4.

Interest received

A.5.

Income tax paid on ordinary income

A.6.

Receipts and disbursement from extraordinary items

A.7.

Dividends received and profit shares

A.***

Net operating cash flow

20,064

128,609

-241,770

-278,483

-2,297

-1,119

0

0

180,213

299,416

-7,423

-11,197

1,373

556

0

-180

2,119

1,885

0

0

176,282

290,480

17 FINANCIAL STATEM E N T S Cash flow statement (non-consolidated) for the year ended 31 December 2004 (in thousands of Czech crowns TCZK) 2004

2003

Investment activity B.1.

Acquisition of fixed assets

-235,516

-242,257

B.1.1.

Acquisition of tangible fixed assets

-214,593

-220,618

B.1.2.

Acquisition of intangible fixed assets

-20,923

-21,639

B.1.3.

Acquisition of long-term investments

0

0

B.2.

Proceeds from sales of fixed assets

4,763

19,783

B.2.1.

Proceeds from sales of tangible and intangible fixed assets

4,763

19,783

B.2.2.

Proceeds from sale of financial investments

0

0

B.3.

Advances and loans to related persons

B.***

Net cash flow from investment activity

-8,612

0

-239,365

-222,474

2,083,806

-56,500

Financial activity C.1.

Change in long-term liabilities and bank loans

C.2.

Increase and decrease in equity from specified transactions

0

0

C.2.1.

Subscription of shares and investments

0

0

C.2.2.

Equity paid to shareholders

0

0

C.2.3.

Other cash contributions from partners and shareholders

0

0

C.2.4.

Loss settlement from partners

0

0

C.2.5.

Payments from funds created from net profit

0

0

C.2.6.

Dividends paid and profit shares including withholding tax paid

0

0

C.***

Net cash flow from financial activity

2,083,806

-56,500

F.

Net increase or decrease in cash balance

2,020,723

11,506

R.

Cash and cash equivalents, end of period

2,073,527

52,804

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

18 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) in thousands of Czech crowns TCZK

1 . D E S C R I P T I O N A N D P R I N C I PA L A C T I V I T I E S Establishment and description of the Company GTS CZECH, a.s. (“the Company”) was registered on 29 November 1995 as CETI ČR, a.s. The change of the commercial name to GTS CZECH, a.s. was entered in the Commercial Register on 8 November 1999. Until the end of January 2001, GTS CZECH, a.s. was a holding company. On 31 January 2001, it merged with DATTEL a.s., GTS Czech Net a.s., GTS Inec a.s. and DATTEL Consultancy, a.s. and became their successor company. The principal activities of the successor company is the provision of telecommunications services (voice and data transmission and internet) and provision of public telephonic service via public fixed line telecommunications network. In April 2002, based on the framework contract signed on 1 April 2002, the operations of GTS CZECH, a.s. and KPNQwest Czechia s.r.o were merged. From January 2003, KPNQwest Czechia s.r.o., GTS CZECH, a.s. and GTS Carrier Services (Czech) s.r.o. have been preparing to merge with the effective date on 1 January 2005. In December 2004, the Company signed a contract with Aliatel a.s. to transfer 100% shares of Aliatel a.s. to GTS CZECH, a.s. The shares were transferred on 11 February 2005. KPNQwest Czechia s.r.o., GTS CZECH, a.s., GTS Carrier Services (Czech) s.r.o. and Aliatel a.s. plan to merge to a successor company GTS NOVERA a.s. with the effective date on 1 January 2005. Shareholder of the Company The sole shareholder of the Company as at 31 December 2004 was GTS Central European Holding B.V., with registered office in Amsterdam, the Netherlands. Changes in ownership structure in 2004 On 13 December 2004, the GTS-Czech, Inc., AnTel Holdings B.V. and GTS CZECH, a.s. signed a contract to transfer 100% shares of GTS CZECH, a.s. GTS-Czech, Inc., the original owner of 100% shares of GTS CZECH, a.s., decided to transfer the shares to AnTel Holdings B.V. On 14 December 2004, AnTel Holdings B.V. was renamed GTS Central European Holding B.V. As at the date of the preparation of these financial statements, the change has not been entered in the Commercial Register. Registered office GTS CZECH, a.s. Hvězdova 1073/33 140 21 Praha 4 Czech Republic Identification number 639 99 501 Members of the Board of Directors and Supervisory Board as at 31 December 2004 Members of the Board of Directors Ing. Milan Rusnák (chairman) Ing. Tomáš Budník Ing. Zdeněk Rathauský

Members of the Supervisory Board Ing. Oldřich Zapletal (chairman) Ing. Milan Bohunský Ing. Vladana Švorcová

19 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) Changes in the Commercial Register in 2004 Statutory body – Board of Directors: Appointment of a member of the Board of Directors on 24 April 2004 – Ing. Tomáš Budník (entered in the Commercial Register on 19 May 2004) On 19 May 2004, the following changes were entered in the Commercial Register: - Dismissal of a member of the Board – Ing. Václav Dolínek (on 27 April 2004) - Dismissal of a member of the Board – Ing. David Duroň (on 27 April 2004) - Dismissal of a member of the Board – Ing. Irena Valdaufová (on 27 April 2004) Organisational structure GTS CZECH, a.s. and KPNQwest Czechia s.r.o have a common organisational structure. The companies are organised as four divisions (technical, operational, financial and commercial) which are subdivided into departments (with the exception of the departments managed directly by the CEO). These are further subdivided into units and work teams.

2. SIGNIFICANT ACCOUNTING POLICIES (a) Tangible and intangible assets Tangible and intangible fixed assets are stated at acquisition cost. Tangible fixed assets costing less than TCZK 10 and intangible fixed assets costing less than TCZK 20 are charged to the profit and loss account in the year that they were acquired. Tangible fixed assets costing more than TCZK 10 and intangible fixed assets costing more than TCZK 20 are depreciated gradually according to a depreciation plan. The cost of internally produced assets includes direct materials, wages and overhead directly related to the production of the asset until the asset is put into use. Depreciation is provided using the following methods and over the periods stated: Assets Buildings – improvements Structures – optical and metallic cables Property – repair and maintenance equipment Property – switchboards Property – microwave devices Property – transfer devices Property – non-telecommunications technology Property – information technology Property – office equipment Property – furniture and other fixtures and fittings Property – means of transport Incorporation expenses Software Adjustment to acquired assets

Method Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line

Period 10 years 10 years 5 - 7 years 5 - 7 years 3 - 7 years 4 - 7 years 5 - 7 years 3 years 3 years 5 years 4 years 5 years 3 – 4 years 15 years

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

20 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or their estimated useful lives. (b) Long-term investments Long-term investments comprise investments in group undertakings and in associated companies and loans provided to group undertakings and are accounted for at cost. Adjustments to reduce the book value of these investments to net realisable value of long-term investments have been established. (c) Inventories Raw materials inventory is stated at cost. Cost includes the purchase price of the inventory and related customs duties, in-transit storage and freight costs incurred. The cost is determined using weighted average method. (d) Establishment of adjustments and provisions Tangible and intangible fixed assets Adjustments to tangible and intangible fixed assets are established based on an analysis of their impairment. Securities and long-term investments The Company established adjustments to long-term investments amounting to the difference between book value and net realisable value. Inventory Adjustments to reduce the cost of inventory to net realisable value are established on the basis of specific identification. Accounts receivable Adjustments to receivables are established using the following rates reflecting the aging structure of receivables: Overdue 1 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days 121 – more

Rate 5% 10% 20% 50% 100%

In addition, the Company establishes adjustments to doubtful accounts based on an analysis of the credit status of customers and ageing structure of receivables. Receivables from related parties are classified as doubtful only where the debtor company is in bankruptcy or it becomes unrelated (i.e. receivables are reclassified as receivables from third party). Other provisions The Company establishes provisions for: a. Untaken holiday which will be paid by the employer in the following year, b. Potential liabilities arising from pending litigations, c. Potential liabilities arising from business activities. (e) Foreign currency translation The Company uses the official CNB daily exchange rate. During the year, exchange gains and losses are only recognised when realised at the time of settlement. At the balance sheet date, foreign currency monetary assets and liabilities are translated at the Czech National Bank official rates for that date. Unrealised foreign exchange gains and losses are recognised in the profit and loss account.

21 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) (f) Leased assets Lease payments are expensed on a straight-line basis over the lease term. Where an asset is purchased at the end of the lease, it is recorded at its purchase price. (g) Taxation Corporate income tax for the year comprises current income tax and the change in deferred tax. Current income tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rate prescribed by the Income Tax Act, and any adjustment to the tax payable for previous years. Deferred tax is provided on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes multiplied by the income tax rate prescribed by the Income Tax Act for the next period. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which this asset can be utilized. (h) Liabilities, loans and financial liabilities The Company classifies as short-term the part of long-term liabilities, bank loans and financial liabilities which is due within one year from the balance sheet date.

3. CHANGE IN ACCOUNTING POLICIES AND PROCEDURES As a result of amendments in accounting procedures, adjustments to acquired fixed assets are charged to the profit and loss account, line 18 – Depreciation of tangible and intangible fixed assets. In prior years, these changes were charged to line 27 – Other operating expenses. Appropriate reclassifications have been performed in order to achieve comparability of information.

4. FIXED ASSETS (a) Intangible fixed assets

Acquisition cost Balance at 1/1/2004 Additions Disposals Transfers Balance at 31/12/2004 Accumulated depreciation Balance at 1/1/2004 Depreciation expense Disposals Balance at 31/12/2004 Net book value at 1/1/2004 Net book value at 31/12/2004

Incorporation expenses

Intangible fixed assets under construction

Software

Total

103 103

328 4,548 -328 4,548

74,546 16,375 -2,004 328 89,245

74,977 20,923 -2,004 93,896

68 21 89 35 14

328 4,548

41,202 20,959 -2,004 60,157 33,344 29,088

41,270 20,980 -2,004 60,246 33,707 33,650

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

22 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) (b) Tangible fixed assets

Acquisition cost Balance at 1/1/ 2004 Additions Disposals Transfers Balance at 31/12/2004 Accumulated depreciation Balance at 1/1/2004 Depreciation expense Disposals Adjustments to acquired assets Transfers Adjustments to fixed assets Balance at 31/12/2004 Net book value at 1/1/ 2004 Net book value at 31/12/ 2004

Buildings

Works of art

Machinery and equipment

Vehicles

Tangible fixed asset under construction

Advances paid

Adjustments to acquired assets

Total

682,755 22,826 -541 705,040

33 33

1,806,302 188,895 -40,936 3,863 1,958,124

1,939 1,341 -1,203 716 2,793

4,579 1,531 -4,579 1,531

147 -47 100

324,325 324,325

2,820,080 214,593 -42,727 2 991 946

264,278 72,045 -541 335,782 418,477 369,258

33 33

840,977 302,093 -38,503 7,108 1,111,675 965,325 846,449

1,924 510 - 1,060 1,374 15 1,419

4,579 1,531

147 100

63,063 21,622 84,685 261,262 239,640

1,170,242 374,648 -40,104 21,622 7,108 1,533,516 1,649,838 1,458,430

Pledged assets are described in note 13. The adjustment to acquired assets reported in the balance sheet as at 31 December 2004 was established in relation to the merger of GTS Czech Net a.s., GTS Inec a.s., DATTEL a.s. and DATTEL Consultancy, a.s. into GTS CZECH, a.s. in 2001 and reported for the first time in the opening balance sheet of the successor company as at 1 February 2001 (see note 10). The adjustment is amortized on a straight-line basis over 15 years in accordance with valid accounting principles.

5. LEASED ASSETS (a) Financial leases As at 31 December 2003, the Company was committed to payments under finance leases for motor vehicles and equipment as follows: 2003 Cars Total

Total lease payments 54,802 54,802

Paid at 31/12/2003 51,411 51,411

Due in 1 year 3,391 3,391

Due in following years -

In 2004, the Company terminated the respective finance lease contracts in respect of cars and replaced them with operating lease contracts. The Company records no liabilities in relation to the finance leases of cars. (b) Operating leases In 2004, the Company paid TCZK 10,402 (in 2003 – TCZK 8,970) for the operating lease of cars.

23 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) 6. INVESTMENTS Long-term Company

AGIS Telekomunikace s.r.o. E-komunikace, s.r.o. Loan from AnTel Holding Germany Total

Percentage share 49% 10% -

Nominal Value of share 490 20 510

Adjustment

-490 -20 -510

2004 Book value 8,612 8,612

2003 Book value -

AGIS Telekomunikace s.r.o. Registered office: Pod hřištěm 6, 101 00 Praha 10 AGIS Telekomunikace was established in 1994 to provide telecommunications services (purchase of goods intended for further resale and retail). AGIS Telekomunikace has reported no business activity from 2002 to 2004. As a result, an adjustment of TCZK 490 to the investment in AGIS Telekomunikace was established in 2002. E-komunikace, s.r.o. Registered office: Hvězdova 1073/33 140 21 Praha 4 In November 2002, the Company and KPNQwest Czechia s.r.o. established eIdentity, s.r.o. with the intention to provide services of a certification authority in relation to the sale and administration of certified electronic signatures. Since the company did not start to provide these services , a 100% adjustment to this investment was established in 2003. In 2004, the company was renamed E komunikace, s.r.o. The change was entered in the Commercial Register on 3 May 2004. From 9 February 2005 to 30 March 2005, the company was renamed GTS NOVERA, s.r.o. On 30 March 2005 the name of the company was changed back to E-komunikace, s.r.o. These changes were entered in the Commercial Register on 9 February 2005. This change is due to the registration of the name GTS NOVERA, which should be given to the company that will be result from the merger of KPNQwest Czechia s.r.o., GTS CZECH, a.s., GTS Carrier Services /Czech/ s.r.o. and Aliatel a.s. In 2004, the Company received no dividends from long-term investments.

7. INVENTORY At the stock-take held on 31 December 2004 the Company identified obsolete raw materials of TCZK 2,266 (2003 – TCZK 1,003). A 100% adjustment was established to these raw material inventories.

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

24 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) 8 . T R A D E R E C E I V A B L E S A N D PAYA B L E S (a) Short-term trade receivables total TCZK 665,152 (2003 – TCZK 686,256) of which TCZK 364,807 (2003 – TCZK 460,292) is overdue. An adjustment to doubtful accounts of TCZK 232,968 (2003 – TCZK 268,377) has been set up at 31 December 2004 to adjust for receivables which may be uncollectible. (b) Short-term trade accounts payable total TCZK 834,533 (2003 – TCZK 925,534) of which TCZK 621,779 (2003 – TCZK 748,533) is overdue. Payment schedules of certain payables were agreed. Some payables are offset against receivables (such as payables to and receivables from other telecommunications services providers). (c) Long-term trade receivables comprise receivable from SITEL due on 31 March 2010 and a long-term advance payment in respect of the lease of building and optical fibres paid to SELF SERVICE.

9. ADJUSTMENTS

Balance at 1/1/2004 Additions Release Balance at 31/12/2004

Adjustment to long-term investments 530 -20 510

Adjustment to tangible fixed assets 14,013 7,108 21,121

Adjustments to inventory

Adjustments to receivables

Total

1,004 1,262 2,266

268,377 -35,409 232,968

283,924 8,370 -35,429 256,885

Adjustment to receivables decreased by TCZK 11,889 due to the fluctuation in foreign exchange rates. In accordance with valid accounting principles, this part of the release of the adjustment was credited to other financial revenue in the profit and loss account.

10. ADJUSTMENT TO ACQUIRED ASSETS As a result of the merger of GTS Czech Net a.s., GTS Inec a.s., DATTEL a.s. and DATTEL Consultancy a.s. as at 31 January 2001, assets increased by the adjustment to acquired assets of TCZK 324,325. The amount was determined as the difference between book value of net assets of merging companies as at 30 June 2000 and value of net assets determined for the merger project based on certified experts’ appraisals. Company

Dattel a.s. Dattel Consultancy a.s. GTS Inec a.s. GTS Czech Net a.s. Total

Book value of net assets at 30/6/2000 237,212 -11,980 40,214 265,446

Value of net assets at 30/6/2000 for the merger project (appraisals of certified experts) 433,220 35,959 120,592 589,771

Difference

-196 008 -47,939 -80,378 -324,325

When determining the value of net assets as at 30 June 2000, provisions were included in the calculation by mistake and results of operation for the period January – June 2000 was not included.

25 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) After the correction of book value of net assets as at 30 June 2002, the adjustment to acquired assets amounts to 327,757 (see table below). Company

Corrected book value of net business assets at 30/6/2000

Dattel a.s. Dattel Consultancy a.s. GTS Inec a.s. GTS Czech Net a.s. Total

240,171 -8,380 30,223 262,014

Book value of net business assets at 30/6/2000 for the merger project (appraisals of certified experts) 433,220 35,959 120,592 589,771

Difference

-193,049 -44,339 -90,369 -327,757

As at 1 February 2001 (the date of the merger of DATTEL a.s., GTS Czech Net a.s., GTS Inec a.s. a DATTEL Consultancy into GTS CZECH, a.s.), the adjustment to acquired assets was undervalued by TCZK 3,432 due to the above described mistake. The Company has not included the difference in the adjustments as it is immaterial in relation to the amount of the adjustment. The following table indicates the effect of the mistake on annual depreciation charge and accumulated depreciation in the prior years: Year

2001 2002 2003 2004

Annual depreciation charge in respect of adjustment to acquired assets was undervalued of 210 229 229 229

Accumulated depreciation in respect of adjustment to acquired assets was undervalued of 210 439 668 897

Comment

11 months (from 1/2/2001)

11. EQUITY Movements in individual components of equity

Balance at 1/1/2004 Distribution of 2003 profit Loss for 2004 Balance at 31/12/2004

Registered capital

Share premium

100,000 100,000

80,974 80,974

Other capital funds 529,552 529,552

Stat. Profit /loss reserve of the current fund period 457 60,235 3,011 -60,235 -52,908 3,468 -95,908

Accumulated losses

Total

-900,148 57,224 842,924

-128,930 -52,908 -181,838

Other capital funds comprise contributions of CETI Hungary made in relation to the purchase the shares of DATTEL of TCZK 250,753, results of operations of the merging companies (DATTEL, GTS Czech Net, GTS Inec, GTS Inc.) and cancellation of equity securities of DATTEL and DATTEL Consultancy in 2001 amounting to TCZK 278,799. The Company plans to transfer the loss for 2004 into accumulated losses.

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26 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) 12. PROVISIONS Other provisions 7,218 3,484 -7,218 3,484

Balance at 1/1/2004 Addition to provisions Release of provisions Balance at 31/12/2004

Other provisions comprise a provision for untaken holiday (including social security and health insurance) of TCZK 1,395, a provision of TCZK 849 for penalty in respect of VAT arisen on additional tax returns, provision of TCZK 1,163 for the liability that might arise in relation to the pending litigation.

1 3 . B A N K LO A N S Interest rate Loan from Nationale Investerings Bank B.V.

Floating

Due date

Payment schedule

Balance at 31/12/2004

Due in 1 year

Due in following years

Interest in 2004

31.3. and 30.9. every year

Last payment on 31/3/2006

90,000

60,000

30,000

7,423

In June 1998, DATTEL a.s. (merged into GTS CZECH, a.s. on 31 January 2001) concluded a contract with Nationale Investerings Bank and Bank Austria Creditanstalt on a long-term loan (TCZK 360,000) and overdraft (TCZK 50,000). As GTS CZECH, a.s. is the successor company of DATTEL a.s., all duties and obligations arising on that contract were transferred to GTS CZECH, a.s. The first instalment of the loan provided by the Dutch Nationale Investerings Bank was paid on 30 September 2000, regular instalments amounting to TCZK 30,000 are paid on 31 March and 30 September; the last instalment will be paid on 31 March 2006. The interest rate has been set as quarterly PRIBOR + margin. The margin is determined in relation to the outstanding amount of the loan and EBITDA for the four immediately preceding quarters. The margin for the last quarter of 2004 amounted to 3.75%. This bank loan is secured by all assets of GTS CZECH, a.s.

1 4 . S A L E S I N F O R M AT I O N The principal activity of the Company is the provision of telecommunications services, such as: - Voice services - Internet connection via dedicated line (DIA) - Connection of customers branches into virtual internet network (IP VPN) - Connection of internet providers to the international network (IP transit) - provision of data circuits - internet connection using dial-up - rent of international data telecommunications circuits - other internet services (web hosting, server hosting, domains, sale of internet equipment – modems,…)

27 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED)

Sale of goods

2004 2003 2004 2003 2004 2003

Sale of services Total

Domestic sales 4,037 2,476 2,051,946 1,850,513 2,055,983 1,852,989

Export --164,491 191,681 164,491 191,681

Total 4,037 2,476 2,216,437 2,042,194 2,220,474 2,044,670

Exports comprise all sales of goods and services in the Czech Republic to foreign entities.

1 5 . PAYA B L E S F R O M S O C I A L S E C U R I T Y A N D H E A LT H I N S U R A N C E Payables for social security and health insurance total TCZK 6,449 (2003 – TCZK 6,967). No payables for social security and health insurance are overdue.

1 6 . TA X L I A B I L I T I E S Tax liabilities total TCZK 8,487 (2003 – TCZK 10,455) of which TCZK 5,261 is value added tax due.

1 7 . E M P LOY E E S A N D E X E C U T I V E S The average number of employees and executives and remuneration paid for the years ended 31 December 2004 and 31 December 2003 are as follows: 2004 Employees Executives Total 2004 Employees Executives Total

Number of employees

Wages and salaries

347 17 364

179,425 24,908 204,333

Number of employees

Wages and salaries

354 15 369

172,503 19,900 192,403

Social security and health insurance expenses 65,816 9,229 75,045

Social expenses

Social security and health insurance expenses 58,907 6,965 65,872

Social expenses

3,454 434 3,888

4,026 310 4,336

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28 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) 1 8 . R E L A T E D PA R T I E S (a) Trade receivables and payables and advances received and paid

AnTel Germany AnTel Holding Ltd. GTS Slovakia GTS CEH GTS TELECOM S.R.L. (Romania) GTS Datanet (Hungary) Sitel-VSAT KPNQwest Network Ireland GTS Polska sp z.o.o Pronet GTS UK KPNQwest Czechia GTS Carrier Services Czech GTS Czech Com Netforce Total

Receivables at 31/12 2004 2003 8,607 50,204 53,158 616 514 91 2,873 8,234 23,290 23 27 139,282 148,424 1,110 317 236 3,690 27,920 29,106 15,630 9,554 78 3,063 417 466 61 111 243,902 283,200

Payables at 31/12 2004 2003 130,366 11,060 6,575 47,209 6,413 12,325 17,880 217 8 63 109,519 84,658 7,448 38,777 187,778 287,740

The Company created a 100 % adjustment to receivables from KPNQwest Network Ireland and GTS UK. Based on the contract signed by GTS CZECH, a.s. and AnTel Holding Germany, trade receivables were reclassified as loans to a related party and were accounted for in long-term investments in 2004 (see note 6). In 2004, liabilities of GTS CZECH, a.s. to AnTel Holding Cyprus, Ltd were transferred to GTS Central European Holding B.V. These liabilities were subsequently, based on the contract signed by the Company and GTS Central European Holding B.V., reclassified as long-term liabilities. (b) Long-term liabilities Creditor (currency)

AnTel Holding (Cyprus) (CZK) AnTel Holding (Cyprus) (USD) AnTel Holding (Cyprus) (EUR) Carduelis (EUR) GTS Carrier Services (Czech) s.r.o. (CZK) GTS Central European Holding B.V. (EUR) GTS Central European Holding B.V. (CZK) Total

Long-term liabilities at 31/12/2003

Due in 2004

Long-term liabilities at 31/12/2004

341,603 527,840 71,402 70,334 1,011,179

-

51,455 70,728 3,035,952 3,158,135

Long-term liabilities in foreign currency at 31/12/2004 2,322 -

Interest expenses in 2004 1,485 4,825 50,657 56,967

In September 2002, long-term loans and all liabilities arising thereof, originally provided by GTS Network Services Ireland (renamed KPNQwest Network Ireland Ltd. in 2002) and GTS Financial Services (renamed KPNQwest Finance B.V. in 2002), were transferred to a new creditor – AnTel Holdings (Cyprus) Ltd.

29 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) Withholding tax was calculated on the interest on these loans transferred to AnTel Holdings with registered office on Cyprus for the period from January – December 2003. As at 31 December 2003, liability arising on this tax amounting to TCZK 7,138 was recognised. In 2004, Group Menatep Limited (100% owner of AnTel Holdings (Cyprus) Ltd) and GTS Central European Holding B.V. concluded a contract on the transfer of long-term liabilities of GTS CZECH, a.s. from AnTel Holdings (Cyprus) Ltd to GTS Central European Holding B.V. Long-term liabilities to GTS Central European Holding B.V. were reclassified as a loan. The loan is payable at creditor’s demand and the interest rate is set at PRIBOR +3.25%. The balance of the loan provided by GTS Central European Holding B.V. includes a long-term loan provided to acquire 100% share of Aliatel a.s. Cash provided for the purchase of the shares of Aliatel a.s. was at the end of 2004 transferred to escrow bank account with ABN AMRO. This part of the loan from GTS Central European Holding B.V. is subject to an interest rate at PRIBOR +3.25%. All loans provided by related parties are subordinated to the loan provided by Nationale Investerings Bank (NIB), i.e. their due dates are deferred until the loan from NIB has been repaid (see note 13). (c) Sales and purchases

GTS Datanet (Hungary) GTS Slovakia GTS Carrier Services /Czech/ GTS Poland Pronet GTS CS Czech GTS CEH KPNQwest Czechia GTS TELECOM S.R.L. (Romania) Total

Sales at 31/12 2004 10,682 27,362 66 1,467 4,934 977 40,325 1,418 87,231

2003 12,087 42,677 1,038 5,827 70 116,490 2,705 180,894

Purchases at 31/12 2004 2003 8,755 25,370 33,914 17,502 1,173 1,959 875 2,093 18,120 7,821 34,574 76,764 13,173 28,297 110,584 159,806

(d) Director’s and Supervisory Board members’ remuneration and loans Members of the Board of Directors and management use the Company’s cars also for private purposes. In 2004, members of the Board of Directors and management were not provided any loans or bonuses for their duties.

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30 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) 1 9 . I N C O M E TA X (a) Current tax In 2004, no tax liability arose. (b) Deferred tax Deferred tax assets and liabilities Receivables 2004 Long-term tangible and intangible assets Receivables Inventory Provision Estimated payables and receivables Accumulated losses Other temporary differences (10% invest. allowance) Deferred tax asset/ (liability)

6,583 589 431 14,476 62,477 84,556

2003 10,632 281 1,309 16,858 44,105 2,865 76,050

Payables 2004 47,773 47,773

2003 60,772 60,772

Difference 2004 2003 -47,773 -60,772 6,583 10,632 589 281 431 1,309 14,476 16,858 62,477 44,105 2,865 36,783 15,278

In accordance with the accounting policy described in 2 (g), a tax rate of 26% and 28% was used to calculate deferred tax in 2004 and 2003 respectively. The Company has not accounted for a deferred tax asset as it is uncertain that future taxable profits will be available against which this asset can be utilised.

20. CONTINGENCIES AND COMMITMENTS (a) The Company did not report in the balance sheet the liabilities in respect of invoices from Český Telecom, a.s. (“ČTc”) for the lease of connection trunks between the telecommunications networks of both companies. These invoices were returned to ČTc, as the Company believes that they contravene the decision of the Czech Telecommunications Office from 11 September 2002 (section IV.) which stipulates that every operator of a public telecommunications network that shares connections points with other public telecommunications networks, establishes and operates telecommunications devices and telecommunications circuits up to the specified dividing line in the connection point on its own account, unless agreed otherwise. The Company and ČTc made no such agreement and the invoices of TCZK 123,671 for the period from January 2001 – December 2004 (2001 – TCZK 28,838, 2002 – TCZK 42,860, 2003 – TCZK 24,977 and 2004 – TCZK 26 996) were returned to ČTc. The case has been presented to the High Court in Prague and District Court for Prague 3. The Company expects that the case will be closed within two years. (b) Invoices of T-Mobile ČR, a.s. (formerly Radiomobil a.s.) for the connection fees for the period November – December 2001 of TCZK 5,603 were claimed. These liabilities were eliminated from the balance sheet by means of an internal credit note. The Czech Telecommunications Office (“ČTÚ”) rejected in the first instance the requirement of T-Mobile ČR, a.s. to invoice higher connection fees. Based on the appeal filed by T-Mobile ČR, a.s., the president of the Czech Telecommunications Office cancelled the decision in the appeal procedure and referred the case to the Court of first instance for a new hearing. ČTÚ interrupted the administrative proceedings. (c) Český Telecom (“ČTc”) initiated administrative proceedings against the Company challenging connection fees set by the Czech Telecommunications Office (“ČTÚ”) in 2001. ČTc maintains it was entitled to charge connection fees of CZK 0.92/min instead of CZK 0.66/min. set by ČTU. ČTc claimed the connection fees set by the ČTÚ in April 2002. The liability arising on these disputes was determined by the Company as TCZK 67,062. The litigation relating to connection fees for 2001 has been presented to the High Court in Prague. The litigation relating to connection fees for 2002 has been presented to the District Court in Prague 3. The Company expects that both cases will be closed within two or three years.

31 NOTES TO THE CZECH STATUTORY FINANCIAL STATEMENTS (NON-CONSOLIDATED) 2 1 . A S S E T S W I T H M A R K E T V A L U E S I G N I F I C A N T LY H I G H E R T H A N B O O K V A L U E The Company has no assets with market value significantly higher than book value.

2 2 . M AT E R I A L S U B S E Q U E N T E V E N T At the end of 2004, the Company decided to purchase 100% shares of Aliatel a.s. On 18 December 2004, the companies concluded an agreement on the transfer of shares. The shares were transferred on 11 February 2005. Consequently, Aliatel a.s. became a subsidiary of GTS CZECH, a.s. Both companies thus became members of the same group. The Company plans to merge with GTS CZECH, a.s., GTS Carrier Services /Czech/ s.r.o., KPNQwest Czechia s.r.o. and Aliatel a.s. The successor company would be Aliatel a.s. and should be renamed GTS NOVERA a.s. Other companies will dissolve without liquidation. All the companies operate on the telecommunications market and their activities overlap. The aim of the merger is to reduce costs, increase effectiveness and quality of provided telecommunications services, as a result of which the position of GTS Central European Holdings group on the Czech telecommunications market would strengthen. The completion of the operational merger of the companies is planned for 2005. Some changes will have to be made in all companies in relation to the planned merger. In order to optimise resources, some employees will be redundant; the use of equipment in all companies will also be optimised. As at the date of the preparation of these financial statements, the Company was not able to determine the effect of the planned merger. Ensuring a smooth merger is the priority of the Company. In relation to the planned merger, GTS CZECH, a.s. and Aliatel a.s. concluded a framework agreement on cooperation. The cooperation will comprise mutual provision of services, leases and sublease of movable and immovable assets, interconnection of telecommunications networks and provision of a common portfolio of telecommunications services. This cooperation will have some implications on the rights and obligations arising from employment relations. In March 2005 the Company moved from Hvězdova 1073/33 to the premises of Aliatel a.s. in Sokolovská 131/86. The Company continued in the lease of the offices in Hvězdova 1073/33 and sublease part of them to IZIP, spol. s r.o. Effectively on 1 March 2005 the rights and obligations arising from employment relations with all employees of GTS CZECH, a.s. were fully transferred to Aliatel a.s. as the successor in accordance with the Section 249, paragraph 2 of the Act No. 65/1965 Coll., Work Code, as amended.

2 3 . G R O U P R E L AT I O N S The Company is dependent of financial support from its parent company. The owner of the Company provided formal representation that it will provide necessary support, if required, at least for the twelve months from the date of these financial statements. Accordingly, these financial statements have been prepared on a going-concern basis.

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32 R E PORT OF CONTROL R E L AT I O N S H I P S Executed by the GTS CZECH, a.s., Company‘s Statutory Body for the accounting period of the year 2004

1 . C O N T R O L L E D PA R T I E S Trade name, IČ (Company No.) and registered office of the controlled party: GTS CZECH, a.s. IČ (Company No.): 63 99 95 01 with its registered office at Praha 4, Hvězdova 1073/33, PSČ 140 21

2 . C O N T R O L L I N G PA R T I E S (i) As far as the controlled party is aware, the following company is the controlling party: A) Trade name and registered office of the controlling party: Global Telesystems, Inc. (GTS-Czech, Inc.) with its registered office at 9 East Locckerman, Dover, Delaware, USA The control relationship lasted from 1 January 2004 until 13 December 2004. The amount of voting rights held by the controlling party in the controlled party. From 1 January 2004 until 13 December 2004: 100% On 13 December 2004, the company GTS-Czech, Inc. transferred 100% of the controlled party‘s shares to the company AnTel Holdings B.V. with its registered office in The Kingdom of the Netherlands. B) Trade name and registered office of the controlling party: AnTel Holdings B.V. (on 14 December 2004 renamed to GTS Central European Holding B.V.), with its registered office at Professor J H Bavinckln 7, 1183AT Amstelveen, The Kingdom of the Netherlands The control relationship lasted from 13 December 2004 until 31 December 2004. The amount of voting rights held by the controlling party in the controlled party. From 13 December 2004 until 31 December 2004: 100% (ii) 100% of the controlling party GTS-Czech, Inc. was, in the 2004 accounting period, directly controlled by AnTel Holdings B.V. Trade name and registered office: AnTel Holdings B.V. with its registered office at Professor J H Bavinckln 7, 1183AT Amstelveen, the Kingdom of the Netherlands. Relationship to the controlled party: The sole (100%) member in the company GTS-Czech, Inc., holding 100% of the controlled party‘s shares for the period from 1 January 2004 to 31 December 2004 (iii) For the 2004 accounting period, 100% of the company AnTel Holdings B.V. was under the direct control of Mellet Corporation N.V., with its registered office in The Kingdom of the Netherlands. (iv) For the 2004 accounting period, 100% of the company Mellet Corporation N.V. was under the direct control of AnTel Holdings (Cyprus) Ltd. with its registered office in the Republic of Cyprus. 100% of company AnTel Holdings (Cyprus) Ltd. was directly owned by the company AnTel Holdings Limited with its registered office in Gibraltar; 100% of the latter was directly controlled by the company Group Menatep Ltd., with its registered office in Gibraltar.

33 REPORT OF CONTRO L R E L AT I O N S H I P S 3 . O T H E R I N T E R - R E L A T E D PA R T I E S Other parties related in the relevant period to the controlled party in the sense of Section 66a, subs. 9 of the Commercial Code, i.e., Act No. 513/1991 Coll., as later amended, to the best of knowledge of the controlled party acting with the due professional care, are the following: A. Trade name and registered office: GTS Czech Com, s.r.o., with its registered office at Praha 4, Hvězdova 1073/33 IČ (Company No.): 61852279 Relationship to the controlled party: The company is directly controlled by GTS-Czech, Inc. with its registered office in the state of Delaware, USA (100%). B. Trade name and registered office: NetForce, spol. s r.o., with its registered office at Praha 4, Hvězdova 1073/33 IČ (Company No.): 64575951 Relationship to the controlled party: The company is directly controlled by GTS-Czech, Inc. with its registered office in the state of Delaware, USA (100%). C. Trade name and registered office: KPNQwest Czechia s.r.o., with its registered office at Praha 4, Hvězdova 1073/33 IČ (Company No.): 48538701 Relationship to the controlled party: for the entire accounting period 2004, the company was partly owned by the company AnTel Holdings Limited (with a 1% ownership interest), with its registered office in Gibraltar; from 1 January 2004 until 20 September, it was directly controlled by the company AnTel Holdings (Cyprus) Ltd. (with a 99% ownership interest) with its registered office in the Republic of Cyprus. On 20 September 2004, AnTel Holdings (Cyprus) Ltd. transferred it 99% ownership interest in KPNQwest Czechia s.r.o. to Group Menatep Ltd., with its registered office in Gibraltar, which thus directly controlled KPNQwest Czechia s.r.o. with a 99% ownership interest from 20 September 2004 until 31 December 2004. D. Trade name and registered office: GTS Carrier Services (Czech) s.r.o., with its registered office at Praha 4, Hvězdova 1073/33, PSČ: 140 21 IČ (Company No.): 257 82 797 Relationship to the controlled party: The company is directly controlled by AnTel Holdings B.V. with its registered office in The Kingdom of the Netherlands (100%). AnTel Holdings B.V. was renamed to GTS Central European Holding B.V. on 14 December 2004. E. Trade name and registered office: eIdentity, s.r.o., with its registered office at Praha 4, Hvězdova 1073/33, PSČ 140 21 IČ (Company No.): 26 73 09 28 eIdentity, s.r.o. was renamed to E-komunikace, s.r.o. on 3 May 2004. Relationship to the controlled party: The controlled party was, in the entirety of the year 2004, a member in this company with a 10% ownership interest, while KPNQwest Czechia s.r.o. was a member with a 90% ownership interest.

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34 R E PORT OF CONTROL R E L AT I O N S H I P S 4 . C O N T R A C T S B E T W E E N I N T E R - R E L A T E D PA R T I E S A N D P E R F O R M A N C E T H E R E O F In the relevant period, a loan contract for 3,500,000 CZK was entered into between GTS CZECH, a.s., as the debtor and GTS Carrier Services (Czech) s.r.o. as the creditor. The balance of the loan inclusive of unpaid interest was 382,098 CZK as of 31 December 2004. In 2004, a loan contract for 50 million CZK was entered into between GTS CZECH, a.s., as the debtor and GTS Carrier Services (Czech) s.r.o. as the creditor. The balance of the loan inclusive of unpaid interest was 51,454,920 CZK as of 31 December 2004.

5 . L E G A L S T E P S M A D E O R A C C E P T E D B Y T H E C O N T R O L L E D PA R T Y I N T H E I N T E R E S T O F O R O N T H E R E Q U E S T O F T H E I N T E R - R E L A T E D PA R T I E S In the past, the controlled party was provided with a loan from the controlling party; the balance thereof as of 31 December 2004 was 914,634,356.96 CZK; in 2002, this loan was assigned to AnTel Holdings (Cyprus) Ltd. with its registered office in the Republic of Cyprus. The controlled party suffered no detriment in consequence of these loan contracts. In 2004, a contract was entered into between Group Menatep Limited (the owner of 100% of AnTel Holdings (Cyprus) Ltd.) and GTS Central European Holding B.V. for transfer of long-term liabilities of GTS CZECH, a.s. from AnTel Holdings (Cyprus) Ltd. to GTS Central European Holding B.V. The long-term liabilities to GTS Central European Holding B.V. were converted into a Promissory note. The Promissory note is payable on the creditor‘s request and its interest rate is PRIBOR +3.25%. The Promissory note by GTS Central European Holding B.V. as of 31 December 2004 also includes long-term credit for purchase of 100% shares of Aliatel a.s. IČ (company No.): 610 58 904, with its registered office at Sokolovská 86, Praha 8. A contract for transfer of 100% shares was entered into on 18 December 2004, and became effective on 11 February 2005. The financial means for the purchase of the 100% shares of Aliatel a.s. was, at the end of 2004, transferred to an escrow bank account kept with the bank ABN AMRO. For this part of the credit provided by GTS Central European Holding B.V., the interest rate is also PRIBOR + 3.25%. In 2002, the controlled party was provided with a loan within the group from Carduelis B.V.; the balance of that loan (inclusive of unpaid interest) was 70,728,549.30 CZK as of 31 December 2004. This credit was, in 2004, assigned within the group to GTS Central European Holding B.V. with its registered office in the Netherlands. The company Carduelis B.V. with its registered office in the Netherlands is directly (100%) controlled by the company Mellet Corporation N.V. with its registered office in the Netherlands. The controlled party did not, within the relevant period, accept or make any other legal steps in the interest of or on request from the interrelated parties. In Prague on 30 March 2005

Ing. Milan Rusnák Chairman of the Board of Directors, GTS CZECH, a.s.

35

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GTS CZECH, a.s. Hvězdova 1073/33 140 21 Praha 4 Infoline: 800 31 31 31

A N N UA L R E P O R T 2 0 0 4 GT S C Z E C H

04